Published By Janet Gershen-Siegel at April 26th, 2018
Can you build credit with no credit? It’s admittedly not easy but it’s far from impossible. Patience and creativity are your best friends.
Bad credit is a challenge. There’s no refuting that. But it is not an insurmountable one. You can get loans for your business even when your credit score is sub-par.
One way to get business credit is by furnishing a personal guarantee. This personal guarantee can come from you, but it can also come from an investor. If a member of the family (your semi-rich uncle, as an example) wishes to have a chunk of your new business, why not offer a chunk in exchange for them giving a personal guarantee to a lender or credit issuer?
Personal guarantees do have a degree of risk. If your business does not take off, then your investor can be left holding the bag if you default on loans and other obligations. Consequently, requesting somebody to furnish a personal guarantee for you is not something which either of you should take lightly.
Without a personal guarantee, some lending institutions will secure a UCC blanket lien on your business. A UCC blanket lien functions as a notice which will go on your credit report. It says that the lending institution has a monetary interest in all of your business’s assets up until you pay off the loan completely. Consequently, there could be unfortunate results if you have to default. Likewise, for truly bad credit risks, your lender may insist on both a UCC blanket lien and a personal guarantee.
A far better alternative is unsecured credit. Unsecured just means you are obtaining credit without putting down any money (with secured credit, you put down a certain sum and can only borrow up to that sum).
So, how do you get unsecured credit? You get it by putting up collateral for your loan. Don’t think you’ve got enough for collateral? Think again. You may have any range of properties which can be used as collateral for a business loan.
You might have a retirement fund, like a 401 (k). Or your semi-rich uncle might give you (or will to you) stocks or bonds. You may own your home. All these assets may be used as collateral for unsecured credit, no matter if that’s in the form of an unsecured business loan or a credit card.
You can use your expected profits as collateral. Let’s say your business has unsettled billings out to your customers. You may have given generous repayment terms so as to sweeten a deal and get the sale. Or possibly your customer is just plain late paying you back. With accounts receivable factoring, you can get up to 80% of your remaining receivables. That being said, you must be in business for at least a year and the receivables need to be with another company (e. g. not with an individual).
Your firm might also have properties which you could tap as collateral. Company assets can include realty– does your business own land, or a building, or part of a building? You can use this real estate as collateral.
It can also mean equipment, if you own it free and clear, although this has to be major equipment. You won’t have the ability to put together a bunch of smaller equipment. This is referred to as an equipment sale leaseback– you are more or less selling your equipment to the lending institution and renting it back from them for the cost of your loan payments.
How about business stock? You can use inventory valued at $500,000 or more and use it for a line of credit worth 50% of your inventory’s value for what’s referred to as inventory financing. Or if you have more like $300,000 worth of inventory, you can get an inventory loan for $150,000 (that is, the loan to value, also known as the cost, is 50%).
So think about what you and your firm own, or are expecting to have in the soon. You just might have more than enough collateral for an unsecured business line of credit even when your personal credit is lousy. You can build business credit with no credit. Learn more here and get started toward building business credit attached to your company’s EIN and not your SSN.